Fitch Affirms Roanoke, VA's GO and IDR at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Roanoke, VA ratings:

--$216.9 million general obligation (GO) bonds at 'AA+';

--Issuer Default Rating (IDR) at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city, payable by the irrevocable pledge of the city's full faith and credit and unlimited taxing authority.

KEY RATING DRIVERS

The 'AA+' Issuer Default Rating reflects the city's stable economic base, supporting historically strong operating performance and a solid revenue framework, coupled with conservative liability management.

Economic Resource Base

Roanoke is located in rural western Virginia along Interstate 81, at the southern end of the Shenandoah Valley and approximately 170 miles west of Richmond. The city has a modestly increasing population of approximately 99,897.

Revenue Framework: 'aa' factor assessment

General fund revenues are primarily funded from property taxes that over the last decade have lagged national economic expansion but have been generally in line with inflation. The city retains an unlimited legal ability to adjust the property tax rate, resulting in notable capacity to respond to a revenue decline in an economic downturn scenario.

Expenditure Framework: 'aa' factor assessment

The city's expenditure flexibility is somewhat limited by the voluntary funding agreement with the school board that allocates a set percentage of revenues annually; however, carrying costs are moderate and broad flexibility to manage labor-related costs allow the city the ability to adjust spending. The natural pace of spending growth is generally aligned with that of revenues.

Long-Term Liability Burden: 'aa' factor assessment

The city's overall debt and pension liability burden is at the high end of the low range. Future debt needs are limited, and the pace of debt amortization is over 70%.

Operating Performance: 'aaa' factor assessment

The city's operating performance demonstrates resiliency. Reserves remained healthy during and after the great recession. Given the city's revenue and expenditure flexibility and strong reserves, the city is poised to perform well in an economic downturn.

RATING SENSITIVITIES

STABLE CREDIT PROFILE: The rating assumes continued slow revenue growth. A material improvement in Fitch's expectations for growth prospects and a reduction in the long-term liability profile could put positive pressure on the rating.

CREDIT PROFILE

Roanoke serves as the regional retail, transportation, manufacturing, and healthcare hub, a position bolstered by its location within the crossroads of major highway and rail systems and complemented by its airport. After a $100 million investment from the Commonwealth for construction, Amtrak service is expected to begin in the city in 2017. Also, through a regional Broadband Authority, the city in partnership with the City of Salem recently completed an initial 47 mile fiber network which is expected to attract new business. Roanoke County will expand the network another 25 mile in 2018.

The city's largest employment sector, health care and social assistance, comprises about 18% of employment and is anchored by Carilion Clinic. Carilion, which is headquartered in Roanoke, is the city's largest property taxpayer (at about 3% of total AV) and private sector employer (nearly 9,000 employees). Carilion continues to expand within the city and has recently purchased property which will result in a new hospital addition and parking garage. Virginia Tech recently announced that funding had been appropriated by the state to build a $67 million expansion of the Virginia Tech Carilion Research Institute, bringing approximately 250 new jobs.

Revenue Framework

The city relies on a combination of property tax revenues and sales and other taxes, which equate to 41% and 29% of general fund revenues respectively in fiscal 2015, as well as intergovernmental revenues (25%).

The city's general fund revenue growth has trended below the rate of inflation on a compound average annual (CAGR) basis over the 10 years ended in fiscal 2015. The city's assessed value (AV) CAGR for the same period was below the rate of GDP growth, and recent growth has been modest at about 1% annually. Other tax revenues mostly include sales, meals and business license tax revenues. While sales and Business, Professional, and Occupational Licenses tax revenues have been stagnant, meals tax revenues have increased above the rate of GDP and inflation representing the economic activity occurring within the city's downtown coupled with adjustments to the tax rate.

There is no legal limit to the property tax rate or levy, providing the city with significant independent revenue raising flexibility

Expenditure Framework

The city's largest expenditure is education at roughly 31% of general fund expenditures, followed by public safety at 27%. Virginia public schools are largely funded by a mix of state and local aid contributions.

Fitch expects the natural pace of spending growth to remain generally in line with to marginally above revenue growth as modest population and student enrollment growth should result in limited increases in expenditure demands.

Fixed carrying costs associated with debt service, actuarially determined pension payments and other post-employment benefits (OPEB) actual payments consume a moderate 15% of governmental spending. The city has broad discretion over the terms of employee wages and benefits given the absence of collective bargaining. However, the city's spending flexibility as it relates to education is limited to a minimum funding level according to state standards, which are applicable to all Virginia municipalities; the city funds more than double the requirement. The city is further limited by the unique funding agreement with the school board through a funding formula that provides 40% of local tax dollars to schools. The school board does retain excess revenues beyond what is needed for the current year which provides a cushion when revenues may be stagnant or if additional revenues are needed beyond the allocated amount. The remaining 60% of such revenues are allocated to the city portion of the city's overall operating budget. Notably, the agreement can be modified with city council approval.

Long-Term Liability Burden

Overall net debt plus the city's unfunded pension liability is low at about 9% of personal income. Debt makes up over half of the liability. The city's five-year capital improvement plan (CIP) for 2017 - 2021 totals $151.7 million and includes total borrowing of $105 million, compared to approximately $233 million of outstanding debt. The plan funds a mix of school and general government projects. Fitch does not expect much of an impact on the debt burden from the additional borrowing given the city's aggressive retirement of outstanding obligations. The city is scheduled to repay more than 70% of outstanding principal over the next 10 years.

City employees participate in one of two pension plans and may also participate in a deferred compensation plan. The aggregate adjusted unfunded net pension liability totals $145 million or approximately 4% of personal income. The city offers other post-employment benefits (OPEB) and contributes the actuarially required amount. As of November 2016, the OPEB liability was 26% funded and the net liability represented less than 1% of personal income. When the net pension liability of the school board is included, the liability increases to over 12%.

Operating Performance

Given the city's superior inherent budget flexibility in the form of control over revenues and spending capacity, Fitch expects the city to manage through economic downturns while maintaining a high level of fundamental financial flexibility. Reserves are expected to remain above the city's 10% target throughout the economic cycle. The unrestricted general fund balance of $29.8 million in fiscal 2015 was 11% of spending, a high level given the limited economic sensitivity of revenues and strong budget controls.

The city proved its financial resilience and strong budget management through the great recession by adjusting programs and services, eliminating positions and cutting capital spending. Fitch expects the city to make similar operational changes as needed during a future economic downturn.

Unaudited fiscal 2016 results show the city's eighth consecutive operating surplus. Management expects to end the year with a $1.6 million operating surplus (less than 1% of spending).

The fiscal 2017 general fund budget of $281 million is a 3% increase over fiscal 2016. The budget keeps the property tax rate unchanged and does not appropriate fund balance. Given the city's long history of positive operations, Fitch expects similar results at year-end 2017.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478

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Contacts

Fitch Ratings
Primary Analyst:
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Parker Montgomery, +1-212-908-0356
Analyst
or
Committee Chairperson:
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Evette Caze, +1-212-908-0376
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Parker Montgomery, +1-212-908-0356
Analyst
or
Committee Chairperson:
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com